Geithner's Latest Gift To Citigroup Owners Finally Done*

*Update: The announcement
is now out. See full text below. And it's not as egregious
a giveaway as initially reported! Geithner is only paying
about 30% too much for your Citigroup common stock instead of
100% ($3.25 a share instead of $5).

You, the taxpayer, will be converting your dividend-paying
Citigroup preferred stock into non-dividend paying Citigroup
common stock. And because Treasury Secretary Tim Geithner seems
determined to gift as much of your money as possible to Citigroup
stakeholders as possible, you'll be doing this at $5, more than
twice Citigroup's closing share price.

If this were a homeowner bailout, it would be equivalent to the
government paying you $500,000 for your house when it's only
worth $250,000. Of course that's never going to
happen. (And, of course, in this case, Citi's house is only
worth $2.50 because taxpayers gave Citi massive second and third
mortgages. If they hadn't, it would be worth zero.).

The Treasury Secretary will try to make it look as though he got
you a great deal because he also gets to fire half of the
Citigroup board. But that's just a symbolic
concession. Boards don't run companies. And a new
board won't stop Citigroup's asset values from plummeting so that
the company will soon need even more of your money.

Which brings up another problem with Geithner's plan. It
doesn't address Citigroup's asset problem.

(What should Geithner have done? Forced Citi to write down
the value of its assets to nuclear-winter levels, and then
converted a bunch of Citigroup debt to equity--including the US's
preferred stock. Instead, he just gave your money away.

What is Geithner thinking here? He's desperate to avoid
taking majority ownership of Citi, in part because Citi's
gigantic hairball of a balance sheet will suddenly be put on the
US's books. He also doesn't want to send a paroxysm of
panic through the bank debt market by notifying bank debt holders
that the bonds they own aren't, in fact, as safe as Treasury
Bills but pay much higher interest--which is currently the case.
So Geithner's capping the US ownership at 40% and keeping
bondholders whole.)

The Treasury
Department reached a deal late Thursday to take a stake of 30
to 40 percent in Citigroup as
part of a third bailout of the embattled bank, according to
several people close to the deal.

Vikram S.
Pandit, the chief executive, will remain at the helm, but
Citigroup will have to shake up its board so that it has a
majority of independent directors, a move that federal regulators
had already been pursuing.

Under the terms of the deal, the Treasury Department has agreed
to convert up to $25 billion of its preferred stock investment in
Citigroup into common stock.

It will convert its stake to the extent that Citigroup can
persuade private investors, including several big foreign
government investment funds, to do so alongside the government,
two people close to the deal said.

The Treasury Department will match the private investors’
conversions dollar-for-dollar. That accounts for uncertainty in
how big the government’s stake will be...

Details remain murky, but the government has agreed to convert
its investment at a price of as much as $5 a share, more than
twice the value of Citigroup’s $2.46 closing share price on
Thursday.

Full text:

-----

NEW YORK--(BUSINESS WIRE)--Citi today announced it will issue
common stock in exchange for preferred securities, which will
substantially increase its tangible common equity (TCE) without
any additional U.S. government investment. The transaction is
intended to build Citi’s TCE to a level that removes uncertainty
and restores investor confidence in the company.

Citi will offer to exchange common stock for up to $27.5 billion
of its existing preferred securities and trust preferred
securities at a conversion price of $3.25 a share. The U.S.
government will match this exchange up to a maximum of $25
billion face value of its preferred stock at the same conversion
price. (See attached transaction summary).Citi Chief Executive
Officer Vikram Pandit said, “This securities exchange has one
goal – to increase our tangible common equity. While we believe
Tier 1 capital remains the most important measure of the
financial strength of banks, we recognize that the markets also
view Tangible Common Equity as an important measure. This
transaction – which requires no additional investment from U.S.
taxpayers – does not change Citi’s strategy, operations or
governance. Our clients and partners will not be affected and
will continue to receive the high level of service they expect
from Citi around the world.”

This transaction could increase the TCE of the company from the
fourth quarter level of $29.7 billion to as much as $81 billion,
which assumes the exchange of $27.5 billion of preferred
securities, the maximum eligible under this transaction. Citi’s
Tier 1 capital ratio is 11.9 percent as of December 31, 2008, and
is among the highest of major banks. This ratio is not impacted
by this transaction.

Based on the maximum eligible conversion, the U.S. government
would own approximately 36 percent of Citi’s outstanding common
stock and existing shareholders would own approximately 26
percent of the outstanding shares. All investors’ new stakes will
be determined following the exchange.

Citi will offer to exchange:

Interim securities and
warrants for privately held convertible preferred securities;

Interim securities and
warrants for U.S. government-held preferred securities; and

Common stock for publicly held
convertible and non-convertible preferred securities.

The interim securities will convert to common stock, subject to
shareholder authorization of the additional common stock needed
for the transaction. The interim securities are common stock
equivalent. The warrants entitle the holders to purchase shares
of Citi common stock at $0.01 a share if such shareholder
authorization is not obtained. If shareholder authorization is
not received, the interim securities will pay a 9 percent
dividend that will increase quarterly.

The non-U.S. government exchange will accommodate all preferred
stock holders other than trust preferred holders. The Government
of Singapore Investment Corporation (GIC), HRH Prince Alwaleed
Bin Talal Bin Abdulaziz Alsaud, Capital Research Global
Investors, Capital World Investors and other investors have said
they will participate in the exchange. Depending upon the
participation rate in the exchange, holders of Trust Preferred
Securities (TruPs) and Enhanced Trust Preferred Securities
(ETruPs) may also be eligible to participate.

The U.S. government will exchange the portion of its existing
preferred securities that is not exchanged for common shares into
new trust preferred securities. These securities will carry an
annual coupon of 8 percent.

In connection with the transactions, Citi will suspend dividends
on its preferred shares. As a result, the common stock dividend
also will be suspended. The company will continue to pay the
distribution on its Trust Preferred Securities and Enhanced Trust
Preferred Securities at the current rates.

The company will host an investor conference call today at 8:30
am (EST). Dial-in numbers for the conference call are as follows:
US & Canada: (877) 700-4194 / International: (706) 679-8401;
Conference code: 88132598. A live webcast of the call will be
available at Citi’s Investor Relations website:
http://www.citigroup.com/citi/fin.

###

Citi, the leading global financial services company, has
approximately 200 million customer accounts and does business in
more than 140 countries. Through its two operating units,
Citicorp and Citi Holdings, Citi provides consumers,
corporations, governments and institutions with a broad range of
financial products and services, including consumer banking and
credit, corporate and investment banking, securities brokerage,
and wealth management. Additional information may be found at
www.citigroup.com or
www.citi.com.

In connection with the proposed exchange offer, Citi will file
with the Securities and Exchange Commission (the "SEC") a
Registration Statement on Form S-4 and a tender offer statement
on Schedule TO that will contain a prospectus and related
exchange offer materials. Citi will mail the prospectus to the
holders of its series of convertible and non-convertible public
preferred stock and TruPs and ETruPs that may be eligible to
participate in the exchange offer. Holders of these series of
preferred stock, TruPs and ETruPs are urged to read the
prospectus and related exchange offer materials when they become
available because they will contain important information. You
may obtain a free copy of the prospectus and related exchange
offer materials (when available) that Citi will file with the SEC
at the SEC's website at www.sec.gov. The
prospectus and related exchange offer materials (when they become
available) may also be obtained for free by accessing Citi's
website at www.citigroup.com and
clicking on the link for "Investors" and then clicking on the
link for "All SEC Filings" or by contacting Citigroup at the
following address or telephone number: Citigroup Document
Services, 540 Crosspoint Parkway, Getzville, NY 14068, or within
the United States, at +1-877-936-2737 or outside the United
States, at +1-716-730-8055, or by e-mailing a request to docserve@citigroup.com.